How Referral Marketing Can Grow Your Profits by Richard Banfield

How Referral Marketing Can Grow Your Profits
by Richard Banfield

The Lifetime Market Value of each customer is based on how much money they will spend with you during their relationship with your company. The only thing standing in the way of a high LMV is if the customer decides not to use your services again. The number one reason for customers not using a service again is because of no customer contact strategy (about 67% of customers). About 15% will not use a service again because they were dissatisfied with the service and another 9% will use a competitor's service. With this knowledge it should be obvious to us that reaching out to past customers is an excellent strategy to develop new business.

What is the most common challenge?
For most companies the immediate challenge is to find clients willing to use their products or services without an extended delay between contact and purchase (i.e., a long sales cycle). For most companies waiting 3–6 months to close a cycle may be too long.

How can this challenge be overcome?
Any clever marketing should make the selling unnecessary, at least in theory. The only way to achieve this is to ensure the message will reach prequalified people with a desire to use the product or service in question.

How is this done?
Clearly most small businesses, or any other business these days, do not have the luxury of embarking on a marketing strategy that follows traditional conversion cycles. The suggestion is to employ a simpler, and ironically more effective, marketing strategy based on referrals. This will entail sourcing, organizing, and contacting a customer list of clients who have used the product or service before.

This is not about asking our friends, "Do you know anyone who you can refer me to?" This is a sophisticated plan to create reciprocal interest in making referrals. By pursuing referrals in an organized and structured way we can turn our existing networks into active referral networks. Referrals offer significant advantages over cold calling and direct marketing leads. For example, referrals are:

Always more cost effective and...
Referrals generally make decisions quicker about purchasing.
They are likely to purchase more often (returning customers).
Less negotiation or convincing is required.
They will be more willing to make further referrals.

What structure does this referral marketing have?
The formula for referral marketing is as follows:

Identify the ideal referral candidates.
Articulate the Unique Selling Proposition (USP) of the product or service and how it relates to their network.
Create the ideal environments for referrals.
Thank the referrers for their help and participation.

Thus an active referral system will look something like this:

Identify targets and referrers based on specific criteria.
Educate and enable referrers to communicate effectively.
Actively trade referrals.
Be present and available (commonly called top-of-mind awareness).
Offer incentives when appropriate (commissions and intro fees).
Make referrals a condition of doing business.

What are the results we might expect?
By creating appointments to meet and educate others in our network, we can develop lots of "pots on the stove." Each educated referrer becomes an evangelist for our services. It is important to realize that it is not the referrer that offers the opportunity, but rather their network of potential clients. We can expect to see the number of referrals increase with the number of referrers we have "activated" in our networks.

Give me examples of how this works.
Recently I observed how when two people sat down and systematically went through their rolodexes they were able to generate over 50 potential referrals. When these two were initially introduced they tried to find ways to work directly with each other but came up with very little. Finding that they could not directly work with each other, they decided to try linking each other's networks together to create opportunities.

Another example was when a client of mine hosted a cocktail party to "enlighten" a group of carefully selected well-connected people in their network. The cocktail party aimed to educate these people so that they will be better informed about the company's services and therefore more likely to see potential referral opportunities. A short presentation that clearly articulates their USP gives the audience better insight into a complex service offering. The event was attractive because of the good food, good company, and not-so-serious approach. Over 35 people attended the party. The host also intends on having one-on-one sessions with each of the guests in the weeks following the party to "work the rolodex" of each guest.

Further creative ideas for active referrals come to mind—seminars, educational workshops, letters of introduction, brain trust meetings, developing an advisory board of well-connected people, sporting events, and partnerships. Less formal engagements are also a fun way of meeting new people and building a referral base. Consider hosting a party in a unique location, a business breakfast with an enlightened guest, or simply have a few friends over for coffee and a discussion about "how we can help each other."

What will the plan look like when it's complete?
Although this is just one example, it is a typical format for a referral-marketing plan. The plan will have three stages:

Stage One:
Create a list of potential referrers
Set up referrer education meetings
Attend networking meetings to "enroll" potential referrers
Identify future events and meetings that provide networking opportunities

Stage Two:
Host one-on-one meetings with referrers
Exchange Rolodex opportunities
Discuss referral incentives and partnerships

Stage Three:
Provide support to referrers with access to business cards, website, and materials
Follow-up calls and meetings
Write thank you notes

What is the timeline for referral marketing?
It is impossible to say exactly how soon actual referrals would result from this type of campaign. In my own experience the sales cycle of a referral is about half that of a traditional cold call. It is also important to remember that this is an ongoing process and not a once-off campaign. You should seriously consider investing a few hours each week to developing this channel of new business. Block off a few hours on your slowest day and start to treat it like a sacred part of your business development process. Arrange a meeting and arrive early because, in the words of Edward Tufte, Professor Emeritus at Yale University, "If you show up early, something good will happen."